New ETF products spurring an already receptive market

Buoyant market conditions and a range of new exchange-traded funds that have been launched this year are helping to drive demand for these increasingly popular investments.

ETF provider BetaShares' figures indicate almost $9 billion has been invested in ETFs in Australia over the past 12 months. More than 30 new ETFs have been launched in 2017 and 2018. The most successful of these funds reveals investor preferences.

Recent figures indicate there's now $36.3 billion invested in exchange-traded products, with $564 million invested in March alone, a 32 per cent increase from February, but 33 per cent less than funds invested in ETFs in March 2017. Year-to-date the ETP industry has attracted $1.5 billion, a 22 per cent rise compared with the same time last year.

"The maturation of the industry is allowing investors to build entire balanced portfolios using only ETFs. As ETFs become more mainstream, investors are using them in different ways. They are using ETFs for the core of their portfolio, and also to express tactical views and for shorter-term trading," says Alex Vynokur, chief executive officer, Betashares.

"Given sharemarket volatility in the first few months of the year, people have bought short exchange-traded products to profit from or protect against market declines," he adds.

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"There is no doubt that ETF assets will continue to grow strongly so we should expect more entrants into the market who will push the boundaries as they attempt to differentiate themselves and to compete for assets," says Alex Zaika, head of wealth at iShares Australia.

Luring younger investors

Vynokur notes ETF investors are getting younger. Data from the BetaShares Investment Trends ETF Report shows the average age of an ETF investor is now 42, dropping from 56 only five years ago. The average age of an investor who used ETFs for the first time in the last 12 months was 38.

"Younger investors are using ETFs as a simple, cost-effective way to instantly obtain access to a diversified portfolio. They are finding ETFs are a very useful way to get a start with investing," he says.

The growing uptake of ETFs by younger investors is being seen across the market.

"Their easy access and low cost is making ETFs a popular investment tool for the Millennial generation," says Meaghan Victor, State Street's Global Advisors' head of SPDR ETFs Australia.

There are different views in the market about how investors are using ETFs. Kris Walesby, head of ETF Securities Australia, says his data shows ETFs are primarily used in buy and hold strategies.

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"But non-standard ETFs are increasingly being taken up by Australian investors, too. These include ETFs with specific themes such as environmental, social and governance ETFs or those that give exposure to sectors like technology.

"Investors are also becoming aware of smart beta or alternative ETFs and how they can make a material difference to portfolio performance as well as allowing investors to target more specific outcomes," he says.

Big changes ahead

Elsewhere, investors are using ETFs to generate income. "ETFs are being used in strategies to minimise the downside risk of a client's portfolio," says Victor.

There are a number of ways investors are changing the way they use ETFs. "The hunt for global income is leading many investors to diversify their portfolios to include global assets within locally domiciled global ETFs," she says.

Regulatory changes are also changing the way ETFs are used. Says Victor: "The Future of Financial Advice reforms and the royal commission into financial services have impacted the way intermediaries are constructing client portfolios, as well as the total cost of the investment portfolio to the client. This has implications for ETFs, which tend to be a lower cost solution."

"We are on the precipice of some big changes about how Australian investors use ETFs. Investors and legislators will no longer stand for high fees from institutions that have breached everyone's trust. We expect to see low-cost, passive options become the first choice investment vehicle," he says.

Neiron says it is important for investors to understand that passive funds do not mean low returns. "Smart beta ETFs go beyond simple benchmarks by identifying an investment approach that has demonstrated historical outperformance compared to the benchmark and their active peers. Investors and legislators are looking for value and performance in investment products. ETFs, especially smart beta ETFs, have the edge in providing this."

Matthew Arnold, head of ETF research and strategy for Asia-Pacific at SPDR ETFs, agrees the regulatory environment will continue to drive ETF demand.

"The ETF market continues to grow rapidly around the world, as different investors gravitate to the product. This is being driven in part by regulations and the current broader investment environment, but also by investors educating themselves about ETFs and index investing generally," he says.

Price war

Arnold says low-cost, building block ETFs continue to be extremely popular and are attracting much of the global fund flow, while areas such as fixed income and smart beta are also growing rapidly.

"Twenty-five years after the launch of the first ETF in the US, the popularity of their structure is continuing to attract new entrants, including active managers. In Australia, the ETF market continues to mature, thanks to steady flows and a growing range of products," he says.

He cautions investors about active ETFs. "While the prospect is attractive to investors looking for an edge, there is no real price advantage at this point."

Selvarajah says there is a price war taking place in the ETF sector. "ETF providers are making Australian equities accessible to all at the lowest price point possible."

When it comes to risk, Selvarajah notes ETFs have the same risk levels as direct equities but are generally a bit less volatile. Nevertheless, he says unquestioned allocation to ETFs is a common trap among uninformed investors.

"This is a concern because for most investors, passive investment alone won't achieve their desired outcomes. Time and again we see the need for an element of active management," he says.